Will the Election Kick Volatility Into Overdrive?

The VIX gained almost 3% today, and is up about 15% in the past six trading days, albeit from incredibly low levels . So will the election be just the catalyst we need for volatility to spring back into the markets? Personally, I just don’t see it. It’s almost a sure thing that the Republicans will win the House, while the Senate will be a near split. What are incredibly unclear are the implications of this. But it’s not as though we’ll wake up Wednesday and know how it all plays out over the ensuing two years. So, the way I see it, to the extent the election matters, the market has pretty much discounted the results. Who cares what I think, though? And I say that seriously. It’s more important to parse what Mr. Market himself (or herself) expects. And if you look very, very closely, you can pick up a slight uptick in volatility anticipation. Thankfully, with weekly options , we have an expiration so often that we can isolate volatility almost to the day. Almost. The next SPDR S&P 500 (NYSE: SPY ) Weeklys expire Friday and carry about a 25.5 volatility. The regular November expiry carries a 19.5 volatility. It’s a similar story in the PowerShares QQQ (NASDAQ: QQQQ ): a 27 volatility for the Weeklys versus about 21 for November. These are measurable, though quite modest bid-ups. I mean, if SPY or QQQQ was a regular stock and had earnings after the bell on Tuesday, you might see weekly volatility double the regular expiration volatility. Not to mention, regular November volatility has a modest bid-up itself. The normally upsloping volatility curve actually tilts very slightly down between November and December expiration. Also worth noting, the election is not the only news event this week, as the Fed meeting and equally well-discounted QE2 news hit as well. It’s tough to put a number on anything given all these moving variables. Realized volatility in SPY right now is about 11, so we clearly see some demand for options beyond what actual market volatility justifies. But if you’re expecting a sudden return to action like we saw in early May, you may have to wait a bit longer. And probably for a catalyst no one sees right now, not a well publicized one. Follow Adam Warner on Twitter @agwarner .
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